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Bitcoin and Other Cryptocurrencies Are Useless, The Economist Says (economist.com)
With few uses to anchor their value, and little in the way of regulation, cryptocurrencies have instead become a focus for speculation, The Economist magazine said this week. From the story, which may be paywalled: Some people have made fortunes as cryptocurrency prices have zoomed and dived; many early punters have cashed out. Others have lost money. It seems unlikely that this latest boom-bust cycle will be the last. Economists define a currency as something that can be at once a medium of exchange, a store of value and a unit of account. Lack of adoption and loads of volatility mean that cryptocurrencies satisfy none of those criteria. That does not mean they are going to go away (though scrutiny from regulators concerned about the fraud and sharp practice that is rife in the industry may dampen excitement in future). But as things stand there is little reason to think that cryptocurrencies will remain more than an overcomplicated, untrustworthy casino.
Can blockchains -- the underlying technology that powers cryptocurrencies -- do better? These are best thought of as an idiosyncratic form of database, in which records are copied among all the system's users rather than maintained by a central authority, and where entries cannot be altered once written. Proponents believe these features can help solve all sorts of problems, from streamlining bank payments and guaranteeing the provenance of medicines to securing property rights and providing unforgeable identity documents for refugees. Those are big claims. Many are made by cryptocurrency speculators, who hope that stoking excitement around blockchains will boost the value of their related cryptocurrency holdings.
Can blockchains -- the underlying technology that powers cryptocurrencies -- do better? These are best thought of as an idiosyncratic form of database, in which records are copied among all the system's users rather than maintained by a central authority, and where entries cannot be altered once written. Proponents believe these features can help solve all sorts of problems, from streamlining bank payments and guaranteeing the provenance of medicines to securing property rights and providing unforgeable identity documents for refugees. Those are big claims. Many are made by cryptocurrency speculators, who hope that stoking excitement around blockchains will boost the value of their related cryptocurrency holdings.
All cryptocurrencies are underpinned by the belief that people will trade something of value for them. That usually means currency, but it could also be material goods or intellectual property.
On top of that value, you have speculation based on other factors; in this case, scarcity and demand. The more the perceived mania continues, the more volatility there will be.
What is different here is that a number of early adopters held onto the currency, and others bought in late. That distorted people's perception of the cryptocurrency where they thought they could all make money fast. Well, lo and behold, the currency crashed since its peak, and seems to be teetering currently.
That there are systemic problems with exchanges and blockchain goes without saying. This is unlike traditional currency because the transaction costs are increasing exponentially and putting additional pressure that a normal paper currency managed by a sovereign central bank doesn't have. That reduces monetary velocity through the system and impedes cryptocurrency use for fine-grained transactions. I won't get into the back door idea or breaking the cryptography, although those might become factors in the future. These translate to additional volatility and uncertainty that hurt the value.
The other big difference between an independent cryptocurrency and a regular currency is who and what backs it. That's probably the greatest concern for The Economist and for those who favor classic economics. This is uncharted territory, and uncertainty will always be punished by the market by participatory withdrawal and diminished value. Only time will tell, but something tells me that Bitcoin and the like may be a game of musical chairs.
... from when 1 BTC value was a fraction of a dollar.
What the Powers That Be don't like is gold. Keynes called it a "barbarous relic" and Warren Buffett derided it. But, central banks have bought a lot of it. Some countries have tried to limit its private ownership, now and in the past.
Currencies started out as mutually valued, divisible objects. Wampum, cowry shells, etc. For whatever reasons, everyone valued gold. It was divisible, didn't tarnish, didn't burn - essentially indestructible. It had all the qualities of an excellent means of exchange and a store of value, over the millennia.
Then people started putting gold into storage and using slips of paper which represented that gold. They could get gold for their slips of paper at any time. The system grew. Fractional-reserve banking was discovered (you can lend out more than you have in your vault because everyone is not going to try and withdraw at once). Emergent properties appeared. People stopped using gold to transact altogether. In 1971, the US "gold window" was closed - cash could not be redeemed for gold. The system continued to function (though the price of gold skyrocketed, and around that time is the mark is the stagnation of the wages of the lower wealth percentiles of society. Coincidence? Maybe, maybe not. Side note: it seems to me to be much easier to skim paper you're printing, and to distribute it to your favored partners than it is to skim gold. But that's another topic).
Fast forward to today, and people are moving away from even using the slips of paper, going to cashless systems where only the balances of an account are tracked. "Purchasing power" is now totally virtual. Some countries and economists are pushing "cashless societies" (Note: most economists missed the oncoming 2008 Financial Crisis).
The digital accounts represent cash. Cash used to represent gold. Now it just represents "purchasing power". What does bitcoin represent that is mutually valued?
The Economist is what Nassim Taleb calls IYI -- intelectuals yet idiots. They write what everyone in the IYI circles already think, right or wrong, but they make it sound more intelectual without adding any real depth to it. Proof of that is their poor track record in forecasting.